How Do Retiree Health Benefit Promises Affect Municipal Financing?
41 Pages Posted: 31 Oct 2023
Date Written: October 15, 2023
U.S. public sector employers have promised over $1 trillion in retiree health and other post-employment benefits (OPEBs) – an unfunded liability of the same order of magnitude as that of U.S. public pensions. We show that states with greater OPEB liabilities and lower funding ratios have higher municipal bond yields. These effects are strongest for states with high health costs, high exposure to the risk of rising health costs, and low ability to renegotiate retiree health plans. Our results suggest that investors price health risks, and plan design directly impacts the magnitude of these risks.
Keywords: Retiree Health Insurance, Municipal Bonds, Public Sector Benefits
JEL Classification: G12, H74, H75
Suggested Citation: Suggested Citation